Britain is building new power stations, which in turn is throwing up
investment opportunities. We look at the different ways to invest

"Don't get mad, get even." If this is your reaction to rising gas and electricity bills – and the steady stream of profits they appear to generate – one response is to invest in energy companies.

There is a huge range of options, from shares in the company behind British Gas to firms operating in the nuclear industry, where hopes of a renaissance have been sparked by the recent agreement to build new reactors in Somerset. Here we look at different ways to invest in energy.

Nuclear power generators

If you want to invest specifically in nuclear power stations your best bet is probably EDF, the giant French company that will build the new reactors. Nuclear stations account for less than half of its total portfolio, however.

It's easy and cheap to buy EDF shares via a British stockbroker or online investment shop. Trading fees are often the same as for UK-listed shares, although the broker is likely to make extra profit when it buys euros to make the purchase.

However, EDF's shares have risen by 85pc this year, making some share analysts doubt the prospects for further improvement. UBS has a "neutral" rating on the shares and thinks they are worth €20.50, well below the current market price of about €25.50.

S&P Capital IQ recently advised investors to sell the shares, valuing them at €22. It said it expected EDF to invest £3.5bn in building the new plant at Hinkley Point in Somerset and then sell about half its stake in the project. It predicted a 10pc return on EDF's investment but added: "Construction cost overruns will be borne by EDF and any savings must be shared with customers."

Another French utility with a nuclear energy arm is GDF-Suez, which runs atomic stations in Belgium. Its shares have also risen sharply in recent months and S&P now rates them a hold.

Companies in the nuclear supply chain

Sometimes the best opportunities are on the fringes of a growth market, especially if you look at smaller companies, which get less attention from investors and analysts.

Many subcontractors can expect to gain work thanks to the Hinkley Point project. One is Aveva, which provides engineering software. The company says its software has been "continuously developed to meet the evolving specific needs of power plant design".

Analysts at Panmure Gordon, the stockbroker, identified the shares some time ago as standing to benefit from increased investment in nuclear projects. It rated the shares a hold with a £23.74 target price – which has since been exceeded, with shares now trading at around £26. Potential buyers might be put off by the company's valuation of about 30 times its annual profits.

Carr's Milling is a small, diversified British company whose engineering arm makes remote handling equipment for the nuclear and petrochemical industries.

Analysts at Shore Capital Stockbrokers said demand for these products meant sales were rising strongly. Investec has a price target of £17.10 on the shares, which have also risen strongly this year to trade at about £17 this week. The company also makes animal feeds and runs flour mills.

Augean is a British company that handles low-level nuclear waste, which it buries in special landfill sites. It's hard to get planning permission for such sites so competitors will find it difficult to break into the market. The business is much more profitable than normal waste handling, said James Smith, manager of the Premier Energy & Water Trust. "It doesn't have much debt and has just paid its first dividend," he said. "It's a unique company and its shares are reasonably valued. We increased our holding by 50pc following the results earlier this month."

If you want to invest in uranium mining BHP Billiton has a site in South Australia, although it is not one of the company's major business units.

'Green' energy companies

There are relatively few quoted companies that specialise in "green" energy, but one is Renewable Energy Generation, an Aim-listed firm that Mr Smith holds in his fund. It develops small wind farms, some of which it sells to raise funds to build more sites. "It has been rather hit and miss financially but there are signs of improvement," he said. "It has a lot of sites going through the planning process at the moment."

Shares in a much larger green power company could be available to investors soon. Infinis, which owns 147 generating plants and says it has a 7.3pc share of the renewable power market, plans to offer at least 30pc of its shares on the London Stock Exchange next month. It operates power stations that burn gas produced by landfill sites as well as onshore wind farms and hydroelectric plants.

Coal

Coal prices have suffered from the "gas boom", said Jack Allardyce and Troy O'Dwyer, mining analysts at Panmure Gordon. As a result, infrastructure companies such as Aurizon, the Queensland railfreight operator, may offer more promise, they said. Coal producers on the London market include Glencore Xstrata, Rio Tinto and Anglo American.

Energy funds

There are numerous funds with exposure to different parts of the energy sector. They range from large, mainstream funds that currently have large energy holdings to smaller, more specialist rivals and tax-efficient but riskier investment trusts.

"The fund with momentum right now is Guinness Global Energy, which has gained 19pc over the last 12 months," said Brian Dennehy of FundExpert.co.uk, an online investment shop. This fund has 63pc of its money in American companies, although the top 10 holdings include Shell and Total as well as ConocoPhillips and Marathon Oil. "This fund is a play on the oil price," Mr Dennehy said.

It is co-managed by Tim Guinness, who also runs the Guinness Alternative Energy fund. Mr Guinness is a "quality specialist manager", said Jason Hollands of Bestinvest, the fund shop.

Mr Hollands said his company was cautious about commodities at the moment and did not rate any energy funds a buy. But he added: "I do hold the Artemis Global Energy fund myself. The managers, John Dodd and Richard Hulf, a former oil analyst and ex-oil company executive, have a huge amount of experience in this area."

Another option is Pictet's Clean Energy fund; its definition includes nuclear power.

Very different are the investment trusts that specialise in renewable energy, several of which have been launched recently. Bestinvest has Bluefield Solar Income, Greencoat UK Wind and Renewables Infrastructure Group on its buy list, although all now trade at a "premium". This means that you pay more for the investment trust shares than you would for the underlying investments if you could buy them separately.

"The attractions of these are that they offer high dividend yields – typically with a policy to raise them in line with inflation – and that a proportion of their revenues are in effect guaranteed by subsidies," Mr Hollands said.

A specialised type of investment trust called a "venture capital trust" or VCT offers an additional benefit in the form of a 30pc tax refund, paid to you at the outset, although you must hold the shares for at least five years. Dividends and capital gains are also tax-free.

It is possible to subscribe for shares in a new VCT called Foresight Solar, which intends to sell its assets and wind up between five and six years after the offer closes. Ben Yearsley of Charles Stanley Direct, another fund shop, said: "Foresight is a very well positioned VCT group. Once a solar plant is up and running it effectively generates inflation-linked income that is tax-free in a VCT."

However, energy funds – even at the more mainstream end – are not for everyone. Philippa Gee, a financial adviser, said: "I would not advise the average investor to consider one of these very specific funds. While there are undoubted opportunities, you may need to hold on to them for longer, and they may be more volatile in the meantime."

The FTSE 100 energy giants

Centrica and SSE, listed in London, pay dividends of 4.6pc and 5.8pc respectively, net of basic-rate tax. However, when fund managers at Miton put utilities' books under the microscope they found that only Centrica's dividend was properly supported by the cash generated by the business.

But the managers, George Godber and Georgina Hamilton of the Miton UK Value Opportunities fund, sold their Centrica shares after Ed Miliband, the Labour leader, said he would cap energy prices if he won the next election.